For Lloyds (LSE: LLOY), 2018 is starting off much as 2017 did with the bank by far the healthiest of its UK-listed peer group, shareholders expecting bumper dividends and billion-pound PPI misselling payments finally, maybe, closer to an end. With these attributes in mind, many investors will be expecting Lloyds to once again outperform the FTSE 100 in the year ahead, but does that make shares of the bank worth buying today?
For income investors, the answer looks like a yes as Lloyds’ current dividend yield of 3.83% slightly outpaces the FTSE 100 average of 3.81% as of December 2017. Looking ahead, there is room to be confident that the bank’s yield will only rise in 2018 as its capital position looks sound with a pre-dividend CET1 ratio of 14.9% as of Q3 well ahead of regulatory requirements.
Likewise, with the bank’s profitability continuing to improve as PPI payments slowly wind down, there should be more cash available to return to shareholders as its statutory return on tangible equity (RoTE) for the nine months to September finally rose above the 10% threshold to 10.5%.
Indeed, analysts are forecasting a 4.71p payout for 2018 that would yield a whopping 6.6% at Lloyds’ current share price. Of course, the bank’s profitability and payouts are dependent on continued economic growth, but as long as the UK economy posts even miserly gains, 2018 could be a great year for income-focused shareholders of Lloyds.
Is growth grinding to a halt?
However, for investors on the lookout for solid capital appreciation prospects, I’m less convinced by Lloyds’ merits. The bank’s current valuation of 1.15 times book value shows that investors have largely factored in future increases to profitability and dividends when buying the bank’s shares.
And while Lloyds’ share price could do very well if it were able to significantly increase its profitability beyond current expectations, I find this a relatively unlikely scenario. This is largely because it has little scope to appreciably grow its top line with economic growth tepid at best and its market share already well ahead of rivals. It has nearly 25% market share for new mortgages and close to that figure for current accounts.
Management has set its sights on the credit card market as a means to boost growth through the £1.9bn acquisition of MBNA’s credit card arm. But compared to even a few years ago, the cards sector has become incredibly competitive with banks tripping over themselves to offer even longer periods of no interest on balance transfers to attract customers.
Some analysts have warned that this is simply setting banks up with a ticking time bomb as consumers pile on more debt while pushing repayment dates long into the future. At the same time, the FCA is ramping up its pressure on the credit card industry with an aim of lowering fees and forcing banks to forgive debts for consumers stuck in persistent debt.
While this MBNA deal may work out great for Lloyds, there are several red flags that concern me. Add to this the bank’s highly cyclical nature and where we are in the business cycle and even an index-beating dividend yield begins to look a bit risky to me. With these issues and low growth prospects, I see plenty of better places for growth-hungry investors such as myself to invest in 2018.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.